Experts give their prescriptions for Brazil as the commodity boom ends

March 27, 2015

Joe Leahy – Financial Times, 3/25/2015

Brazil’s economy has slowed sharply. The brakes were applied by the end of the commodity supercycle that occurred in the first decade of the 21st century combined with rapid credit growth.

The debate in Brazil has returned to the vexed question of how to make one of the world’s most inward-looking economies more competitive.

The answer lies in improving education, streamlining taxation, simplifying bureaucracy in general, and fixing infrastructure. But beneath these concepts are complex questions that run as deep as Brazilian politics and culture itself.

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What Investors Think About Brazil Political & Currency Risk

March 27, 2015

Kenneth Rapoza – Forbes, 3/27/2015

Michael Reynal, portfolio manager at the $287 million RS Emerging Markets Fund (GBEMX) puts it this way: “Politics are ruining a good investment story in Brazil.”

It has oil. It’s the No. 1 orange juice exporter, coffee exporter, sugar exporter, iron ore exporter, beef exporter and the No. 2 soybean exporter. It has a diverse economy and strong banks. It has a growing consumer class and they’re constantly aching to spend like crazy North Americans. Nobody cares.

A colossal corruption scandal involving Petrobras and the ruling Workers’ Party has hundreds of thousands protesting in the streets. Two weeks ago, some of them even called for impeachment. And this week, a polling firm called MDA showed that more than 59% of respondents think president Dilma Rousseff should be impeached.

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Brazil and its president: Dealing with Dilma

March 26, 2015

The Economist (print edition), 3/28/2015

SHE is less than three months into her second term, but already most Brazilians want to see the back of Dilma Rousseff. Grappling with a sickly economy and a hydra-headed corruption scandal at Petrobras, the state-controlled oil giant, she finds herself almost friendless in Brasília. She has already lost control of a Congress where, in theory, her coalition has a comfortable majority. More than 1m Brazilians took to the streets on March 15th to repudiate their president. Her approval rating has fallen by 30 points in six months to 13%, the lowest for a Brazilian president since Fernando Collor in 1992, on the eve of his impeachment for corruption.

Nearly 60% of respondents in one poll believe that Ms Rousseff merits the same fate. It is not hard to see why voters are angry. She chaired Petrobras’s board in 2003-10, when prosecutors believe more than $800m was stolen in kickbacks and funnelled to politicians in the ruling Workers’ Party (PT) and its allies, 47 of whom face criminal investigation. She won last year’s presidential election—albeit by just 3% of the vote—by assuring Brazilians that their living standards, jobs and social benefits were threatened only by her opponents.

In fact, as many voters now realise, Ms Rousseff was peddling a lie. It was the mistakes committed in her first term that have led to the spending cuts and tax and interest-rate rises she is now inflicting (and which have earned her the enmity of her own party). Add the perception that her re-election campaign may have been partly financed by money stolen from Petrobras, and Brazilians have every reason to feel they are the victims of the political equivalent of a confidence trick.

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Brazil’s fall from grace of its own making

March 23, 2015

Financial Times, 3/22/2015

Brazil is in crisis. Earlier this month, more than 1m protesters took to the streets to voice their discontent. Much of the country suffers water rationing following a long drought. Petrobras is engulfed in an epic corruption scandal that saw up to $10bn embezzled from the oil company. The economy is likely to shrink this year and perhaps next year as well, which would be its worst performance since 1931. Approval ratings for Dilma Rousseff, the president, have slid to 13 per cent, the lowest on record. It seems only yesterday that the country was feted as the new best thing. So its fall from grace has been spectacular. Sadly, the situation is likely to get worse still. The central question is whether Brazil’s institutions hold as it does.

A large part of the blame lies with Brazil itself. For much of the 2000s, it enjoyed an unprecedented commodity boom. This bolstered its terms of trade, swelled government revenues, boosted domestic wages and propelled a domestic credit boom. When investors clamoured to buy into Petrobras’s 2010 $70bn equity offering — the world’s largest — Brazil really did seem to be o melhor país do mundo, the best country in the world. In reality, it was riding the steroid fix of a credit boom in which Brazil reaped the benefits of globalisation without any of its disciplines. Now the process is going into reverse.

The collapse in the currency, down almost a third against the dollar in just six months, is a dramatic repricing of the economy. But the trade-weighted real exchange rate, which adjusts for inflation, is still higher than its 20-year average. Unit labour costs are also higher, in dollar terms, than in 2010. So the currency is likely to weaken more.

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Democracy, Brazil Style: Why Dilma Rousseff Will Survive the Protests

March 23, 2015

Kathryn Hochstetler – Foreign Affairs, 3/22/2015

Earlier this month, the streets of Brazil’s major cities filled with protestors. Timed to the 30-year anniversary of the end of military rule in 1985, the March 15 protests were probably the largest since Brazil became a democracy and were certainly larger than the widely reported demonstrations of June 2013. Yet real numbers are hard to come by. Protests were clearly biggest in the city of São Paulo, but estimates of the size of the crowd gathered there range from 210,000 (Instituto Datafolha, which is linked to the Folha de São Paulo newspaper) to over a million (the state-controlled military police). If the lower estimate is correct, some hundreds of thousands of people came out onto the streets across the country. If the higher estimate is right, the total would be around 1.7 million people.

The size matters; those who marched had a harsh message for President Dilma Rousseff, now ten weeks into her second term of office. Many called for her impeachment, evoking memories of the million or so who, in 1992, successfully marched for the impeachment of President Fernando Collor de Mello. Many commentators, therefore, take the number of protesters as a measure of how long Rousseff has left in office.

Although demands for Rousseff’s impeachment made headlines around the world, however, the real story is Brazil’s economic troubles and its ever-growing corruption scandal. Economic growth has flatlined, and inflation and government deficits are rising quickly. In her first term, Rousseff was unsuccessful in stimulating the economy, and she has few new options left except economic austerity. Ironically, meanwhile, Collor is now not only a senator but also among the 34 sitting congressional representatives just placed under formal investigation and possible indictment for corruption. With 16 others, including the treasurer of Rousseff’s governing Workers’ Party (PT), these representatives are accused of taking part in a kickback scheme that skimmed money from the state-controlled oil company Petrobras and redirected it to Rousseff’s 2010 campaign and the personal fortunes of many participants.

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Brazil’s Slumping Economy and Bribery Scandal Eat Away at Dilma Rousseff’s Popularity

March 20, 2015

Simon Romero – The New York Times, 3/20/2015

President Dilma Rousseff ran for office declaring that she would harness an oil bonanza in Brazil to supercharge the economy while avoiding the corruption and mismanagement that have plagued other oil-rich countries in the developing world.

But less than three months into her second term as president, Ms. Rousseff is fighting for her political survival as Petrobras, the national oil company she oversaw and has championed, reels from a colossal bribery scandal.

Compounding her problems is the prospect that the economy could shrink in 2015 for the second consecutive year, the first such contraction here since the onset of the Great Depression in 1929 and 1930.

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Rousseff’s Perfect Storm Signals New Era of Politics for Brazil

March 19, 2015

João Agosto de Castro Neves – World Politics Review, 3/18/2015

2015 has already been a very difficult year for Brazilian President Dilma Rousseff. After a hard-fought re-election last October, the most competitive in the past two decades, Rousseff is now confronted with the need to implement meaningful fiscal adjustments amid declining approval ratings and popular unrest, after hundreds of thousands took to the streets in protest Sunday. The series of negative developments since her re-election has been dramatic but is likely to get even worse, with Rousseff in the eye of a political perfect storm.

The scandal and ongoing investigations surrounding state-controlled oil giant Petrobras are the biggest concern, having implicated major Brazilian construction companies and dozens of politicians in an extensive kickback scheme. The costs of the scandal will be felt far beyond Petrobras and the oil sector, as the exhaustive investigations will prolong the disruption of investments in infrastructure and energy. Many construction companies, now locked out of credit markets, are struggling to stay afloat, while Petrobras has slashed its investment plans and crippled its network of suppliers. The risk of contagion from this sector to the broader economy looms large, further dampening growth forecasts for this year.

Politically, Rousseff is likely to become more isolated as members of the ruling coalition face prosecution. The Supreme Court has already authorized investigations of 34 sitting politicians for alleged involvement in the kickback scheme, leading to more tension between Rousseff and her allies. On Tuesday, the main opposition said it would call on the court to investigate Rousseff, too. In addition, Congress has launched new probes and will seek to score political points by uncovering more wrongdoing. All this will drag into 2016 and seriously impact Rousseff’s capacity to govern.

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